The Potential of Alternative Fuels in Kenya: Entrepreneurial Opportunities from Imperfect Markets

Abstract

Overview Kenya's fuel industry exhibits characteristics of both a highly inefficient market as well as those found in markets with potential for generating lucrative business, depending on whether it can solve the fuel supply equation. Given the logistical and financial restraints, Kenya's indigenous oil and gas industry does not seem viable in the short term as an aspiration of achieving self-sufficiency in fuels and energy. The ongoing increase in transportation fuel demand is putting upward pressure on oil prices, worsening Kenya's dependence on oil imports and deteriorating the country's balance of payment as a result, which together with the introduction of market-friendly policies, such as the elimination of the tax on ethanol, open up an attractive ethanol market. Methodology We take a market research analysis approach to the question before us: the fuel market in Kenya. A comprehensive review of Kenya's fuel industry reveals a number of constraints to achieving fuel security. Conversely, the same chain of constraints shows scalable and profitable market niches for a local fuel industry to emerge. We examine how Kenya may harness its strengths and geographic position within East Africa to play a strategic role in the fuel supply chain. We examine the following approaches: 1. Government policies toward alternative fuels. 2. Supply chain: a. Local production: Is there enough feedstock? b. Distribution channels. 3. Demand response. 4. Impact on Kenyan balance of payments. Results The current imperfect fuel market in Kenya creates fertile terrain for an alternative fuel industry to flourish. The conditions that create momentum are as follows: Refined petroleum products are entirely imported in the absence of Kenyan indigenous oil and gas supplies. Poor infrastructure and logistics create cost differences for fuels across counties, allowing niche markets for petroleum substitutes to prosper. Growing demand puts a strain on existing infrastructure that needs substantial upgrading. Meanwhile, alternative ways of meeting the fuel logistics emerge from such physical constraints. Market-friendly policy actions, such as the elimination of taxes on ethanol, may encourage consumers to take a second look at ethanol as a feasible replacement for petroleum fuels. Conclusions Our research concludes that by diversifying its fuel portfolio and by developing a local ethanol market, the Kenyan government would not only be more energy secure in the medium and long term but it would also improve its balance of payments with annual savings offsetting annual investment in the new fuel. Moreover, shifting investment from oil imports to local ethanol resources would have a significant positive effect on the national GDP, benefiting the country as a whole.